Tuesday, July 03, 2007

Baltic Real Estate / Bubble World Tour

Speaking of a rolling bubble....... I have visited Tallinn in 2004 and it is a beautiful city with lots of history. Back then the city was a big building site with renovations etc going on almost at every corner and i was already stunned from the 2004 prices. In hindsight these offers looks like bargains.....

Ich habe Tallinn im Jahr 2004 besucht. Eine traumhafte Stadt mit jeder menge Historie. Seinerzeit war es bereits eine einzige Baustelle (überwiegend Renovierungen). Beim Blick ins Maklerbüro konnte ich schon 2004 die Preise kaum glauben. Rückblickend waren das allesamt echte Schnäppchen.

this is from Bloomberg http://tinyurl.com/242umm

Standard & Poor's Ratings Service on May 23 changed Lithuania's credit outlook to negative from stable, warning of a ``hard landing.'' To avoid a rating cut, Lithuania needs to rein in spending to help curb domestic demand and banks should tighten lending policies to reduce credit growth, the rating company said.

The country's application to adopt the euro at the beginning of this year was rejected because the inflation rate exceeded EU criteria. The government has refused to set a fixed target date, saying the best time for euro adoption will begin in 2010 when inflation is expected to slow

Property in the Baltics, till recently Europe’s hottest residential investment destination, is now expensive. Apartments in the capital cities of Baltic countries are priced at around the same level as Copenhagen, Helsinki and Stockholm...

Why have Baltics’ property prices surged so strongly? Research suggests that long term property price rises are strongly correlated with high GDP growth rates (though there are many other additional factors).

>Like "exotic financing" in the us.....or as in the case of the baltics financing in a foreign currency (mainly €)......According to the SEB (Swedish bank) almost 70 Percent!!!!!! in Latvia are using € mortgages......

>Wie zum beispiel die halsbrecherischen finanzierungsformen in den usa..... In den baltischen staaten wird zu einem hohen anteil die immobilien in fremden währungen (hautpsächlich €) finanziert.....Nach Zahlen der schwedischen Bank SEB lauten in Lettland schon 70 Prozent der Kredite auf Euro

The list of European countries which in the past five years have experienced high per capita GDP growth is, unsurprisingly, headed by Latvia, Estonia and Lithuania – which all experienced above 8% GDP per capita growth (as did Belarus, where however foreigners cannot buy).

While the Baltics’ continued strong GDP growth suggests continued good news for residential investors (Latvia returned 10.7% GDP growth in the first quarter of 2007), one trend is worrying for investors – income returns on property investment in the Baltics are falling.

In Tallinn, city centre prices increased, in the two years to end-2006, from around €1,358 per sq. m. in December 2004 (average of all apartment sizes), to around €2,432 at end-2006, according to Global Property Guide estimates – an increase of around 79%.

However, monthly rents did not move much upwards. They increased from an average of €9.8 per sq. m., to around €11.6 per sq. m.(according to Global Property Guide estimates) – an increase of only 18%.

Tallinn’s average rental yields have therefore fallen significantly, from around 8.47% to an average of 5.77%.

The figures in Latvia (5,04%) and Lithuania (4,39%) are even worse........

All yields figures are gross, i.e., before any costs, taxes, etc. These falling yields suggest trouble ahead

Western Europe
What about the West European countries in our table? Some also yield good rental incomes for residential investors, including France or the Netherlands (though at best they yield 2% - 4% less than the very highest yields Eastern European countries).

The problem is that they have quite substantial disadvantages as investment destinations: Western European property is expensive, in sq. m. terms.

The high yielding Western European countries have significantly lower real GDP growth (see GDP/cap Growth 5 Years) than their Eastern counterparts. Not just lower growth – dramatically lower growth.
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